Group assignment 2 effects of trade theory explanation

Group Assignment 2
Effects of Trade
Team members:
Nguyen Toan Duong

S3836195

Lecturer: Mr. Daniel Borer

Pham Quoc Khai

S3836559

Due Date: 17th August 2021

Tran Bao Ngoc

S3836222

Vuong Do Thanh Uyen

S3818539

Nguyen Quoc Bao

S3836287

Unit Code: ECON1269

Word Count: 1648
1

Group-work Report

Name

Nguyen Toan Duong

Pham Quoc Khai

Allocation
Question 1.a
Question 2.b
Question 2.e

Contribution

100%

100%

Tran Bao Ngoc

Question 2.c

100%

Vuong Do Thanh Uyen

Question 1.b

100%

Nguyen Quoc Bao

2

Task

Question 2.a
Question 2.d

100%

Signature


Abbreviations
SFM: The mixed specific factors model
MVPL : The marginal value product of labour
MPL: The marginal product of labour
DCA: Domestic currency appreciation
ASEAN: Association of Southeast Asian Nations
CBU: Completely built-up
ToT: The terms of trade
OEC: The Observatory of Economic Complexity
FDI: Foreign direct investment
H-O: The Heckscher-Ohlin model

3

Table of Contents
QUESTION 1:..........................................................................................
A.

THEORY EXPLANATION:

B.

TERMS OF TRADE:9

5

QUESTION 2:..........................................................................................
A.

INCREASING RETURNS OF SCALE: 11

B.

HECKSCHER-OHLIN MODEL: 13

C.

LABOR EXCHANGE:

D.

RECOMMENDATIONS FROM IRS:

E.

RECOMMENDATIONS FROM HECKSCHER-OHLIN MODEL: 17

15
17

REFERENCES:.......................................................................................

4


5


Question 1:
a. Theory explanation:

pCMPLC(LC/KC)

pTMPLT(LT/AT)

Cloth
Production
Capitalists’ Income

Tobacco
Production
Farmers’ Income

E

W

LC

LT

Figure 1. Equilibrium of the mixed specifics model

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The mixed specific factors model (SFM) illustrates the trade's influences on an economy
where one production factor is specific to an industry (Tohamy & Mixon 2003). In a perfectly
competitive market, the SFM supposes that an economy manufactures two commodities
(export product tobacco and import product cloth) actually utilizing three factors of
production (labor, capital, and land) because each industry wields differentiated specific
capital. Thus, Tobacco industry's land and Cloth industry's capital industry are specific
factors, whereas labor is liberally and costlessly mobile across industries. Afterward, the
firms in each production select an appropriate labour input to maximize profit until the wage
(W) equals the marginal value product of labour (MVPL): WC=PCMPLC(LC/KC),
WT=PTMPLT(LT/AT) with L=LC+LT (McLaren 2012). Point A signifies the equilibrium labour
allocation to two sectors and the equilibrium wage (w). The horizontal and vertical line
respectively shows the number of employed workers and their wage for each industry, hence,
the shaded area represents the capitalists' income and land owners' earnings after subtracting
the salary payment. According to the law of diminishing return, the downward sloping MVPL
curve manifests if labor usage increases, the MPL will decline since the output price is fixed
(Akay 2009).

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pTMPLT(LT/AT)

pCMPLC(LC/KC)
p’CMPLC(LC/KC)

W
W’

Cloth
Production
Capitalists’ Income

E

A
E’

L’C

Tobacco
Production
Farmers’ Income

B

L’T

Figure 2. Effect of domestic currency appreciation (DCA) on the mixed specifics model

8


The domestic currency appreciation (DCA), which is the increment in one country's currency
value relative to another country's currency, could hamper exports and diminish import goods'
price (Hsing 2018). Hence, the terms of trade, which represents the ratio of a country's export
and import prices, will grow significantly and have a positive effect on domestic cost-push
inflation (Yetiz 2017).

Although the foreigners receive the more exorbitant export price, the domestic export price
actually remains constant leading the MPLT curve to be unchanged. Otherwise, the import
price's decrease makes the cloth labor demand reduced, so the MPLC curve shifts leftward to
point E' where cloth workers suffer a lower wage (W'). So, cloth employees will move to
work in tobacco industry for a higher price (Krueger 2020), meaning cloth industry witnesses
a loss of labor (a blue double arrow). Applying the law of diminishing return, tobacco
employers will curtail the wage to reduce the workforce overcrowding (L'T).

Consequently, both cloth capital owners and cloth workers experience a decrease in their
income, but the cloth price decline will improve their welfare due to reduced labor
competition. In contrast, an increased number of employees in the tobacco sector shrinks
their wage down, whereas the land owners' income enlarges.

9


b. Terms of trade:
Exports of Thailand with Vietnam (international $)

1400
1200

1200

1050

1030
International $

1000
800

789
680

600

535

543

494

388

400

299

200
0

2014

2015

2016

Refined petrolium

Air conditioners

2017

2018

Figure 3. 2 main exports products of Thailand with Vietnam (2014-2018) graph
Source: OEC (ld/en)

Imports of Thailand with Vietnam (internation $)
1400
1150

1200

1140

International $

1000
834

792

800

720

600
400

430

403

423

272
205

200
0

2014

2015
Crude Petrolium

2016

2017

2018

Broadcasting Equipment

Figure 4. 2 main imports products of Thailand with Vietnam (2014-2018) graph
Source: OEC (ld/en)
10


During the last five reported years, refined petroleum and air-conditioner had the highestearning exports. However, Thailand has replaced China as Vietnam's biggest fruit and
vegetable exporter due to the increased domestic demand in 2017 (Tung 2018). By 2018,
Vietnam's import tariffs on automobiles from ASEAN have been drastically reduced to 0%
for CBU, which lead to increases in CBU imports from manufacturing hubs of Thailand
(Shira & Associates 2018). Oil ranks 2nd to broadcasting equipment on the list of Thailand’s
primary imports from Vietnam. Since Thailand's domestic crude oil reserves are decreasing,
the country has acquired a huge volume of Vietnamese crude oil, resulting in a dramatic
increase in Thai imports from Vietnam (Eia 2017).



Calculation of the ToT:

2014

2015

2016

2017

2018

Total export price

1088

1588

1215

1524

1593

Total import price

1237

925

1064

1580

1563

Terms of Trade (ToT)(%)

87.955

171.676

114.192

96.456

101.919

Table 1. Terms of trade calculation (unit: %)

Thailand has a positive ToT because the export prices are higher than the import prices,
which indicates that every amount of exports sold, it can buy more imported goods.



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Conclusion:


Thailand remained Vietnam's biggest trading partner in ASEAN, whilst Vietnam is the
second-largest trading partner in Thailand (Duc 2021). Regarding investment, Thailand
currently ranks 9th top investors in Vietnam which Thai firms are progressively dominating
distributing systems and replacing items created in Thailand with those manufactured in
Vietnam (VNA 2018). In the past, Vietnam’s trade deficit with Thailand has constantly
increased because Vietnam's primary imported high-value products while only exporting
lower-value products (Nhan Dan 2018). However, Vietnam achieves a trade surplus for the

first time with Thailand thanks to the tremendous growth of fruit and vegetable exports to the
country in 2021. The important solution for Vietnam to gradually maintain trade balance with
Thailand is improving the competitiveness in quality, affordability and safety of Vietnamese
agricultural goods.

Question 2:
a. Increasing returns of scale:
Telephones (% of total export market value)
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%

2014

2015

2016

2017

2018

Figure 5. Telephones export of Vietnam (unit: % of total export market value)
Source: OEC (ld/en)

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Increasing economies of scale is when a firm enhances its level of output by taking the cost
advantage since there was a reverse relationship between the per-unit fixed cost and the
quantity of production, it refers to the input sourcing division or innovating the manufacture
process (CFI n.d). Figure 5 illustrated a significant growth by 5.13% within 5 years of the
telephone export segment of Vietnam, since most of foreign companies are looking to adapt
the internal economies of scale by deploying high-tech machine to replace the human labor,
as a result, foreign enterprises in the telecommunication industry can achieve lower fixed
cost, higher output production.
Intra-industry is determined as the trade among countries within the same industry and level
of development, it also includes foreign direct investment to locate its affiliates in different
countries to trade goods and services (OECD 2010). Therefore, the intra-industry has taken
part in the telecommunication industry in Vietnam since most of the telephone’s brand in
Vietnam are from FDI companies such as Samsung is the one that prioritize the quality and
competitiveness over incentives (Tung 2020), or Apple which has invested $101 million for
more FDI project to enter Vietnamese market (Vietnaminsider 2021), which explains why
most of Vietnamese telephone brand has withdrawn as they are unable to compete with these
giant FDI firms. Although the industry has gained lots of successes and profits, it is recently
struggling with COVID-19 crisis. The export of phones and material in 2020 have shrunk
0.4% compared with 2019, and the growth rate grew 4.4% which was only half of 2018
(8.4%) (Le 2021).

13


b. Heckscher-Ohlin model:
Footwear export (% of total export marrket value)

8.60%
8.40%
8.20%
8.00%
7.80%
7.60%
7.40%
7.20%
7.00%

2014

2015

2016

2017

2018

Figure 6. Footwear export of Vietnam 2014-2018 (unit: % of total export market value)
Source: OEC (ld/en)

Figure 7. Size of skilled labor in Vietnam
Source: Vu 2020

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The Heckscher-Ohlin model is a comparative advantage model in international trade. It

demonstrates that countries which have abundant capital are more likely to export capitalintensive goods, meanwhile, countries in which labor is approximately abundant will tend to
export labor-intensive goods (Morrow 2010). Overall, countries export what they can most
productively and amply produce.

One of Vietnam's main export industries is the footwear industry. In 2018, the footwear
industry ranked second in exporting products to other countries, accounting for 7.62%, and
only behind electrical machinery, equipment with 36.6% of total exports (OEC n.d). Vietnam
is known for its exceptionally evolved footwear producing industry, and it's currently the
world's second biggest footwear exporter after China. Vietnam's footwear export economy is
valued at $22B/year (Kennemer 2020). Vietnam has accomplished fast economic
development since the improvement in the 1990s and has taken advantage of expanding FDI.
In spite of the fast turn of events, the number of skilled workers is narrow compared to the
need of the industrialization, modernization and global integration process. The number of
skilled labors in Vietnam took only 10.2% of total employment in 2014 (Figure 7). Although
this number is increasing constantly, Vietnam still has had a shortage of skilled workers. In
2018, the number of skilled workers was 20.3% of total labor employment (Vu 2020). Hence,
connecting to the H-O model, there are unskilled workers in Vietnam.

As other industries, the footwear industry has faced many difficulties because of Covid-19. In
the first half of 2020, footwear exports decreased by 8.6% year on year. Most workers had to
reduce their working time to 4-7 hours per day and 3-4 days per week. It leads to a reduction
in their income (CARE 2020).

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c. Labor exchange:
Foreign labor with advanced education has played an important role in international trade
(Nishiyama 2013). Specifically, Japan and Korea are industrialized countries, have a high
demand for skilled personnel. Meanwhile, the Vietnamese footwear industry has a shortage of

managerial skills (Lan 2016). Following the SFM, if Vietnam enables skilled workers from
Japan and Korea to work in the footwear industry, it will accelerate trade, and maintain
economic growth with industrialized countries (Alessandro 2002). Besides, labor endowment
is the key for the comparative advantage of developing countries. The SFM assumed that the
labor intensity of export industries in developing countries is higher than that of importcompeting sectors (Alessandro 2002). Therefore, trade liberalization raises overall labor
demand (Fishlow 1984). Particularly, trade liberalization will increase the relationship
between employment indicators and sectoral wage, sectoral trade variables include trade
prices, trade flows, trade policy variables (Fishlow 1984). However, based on the Rybczynski
theorem, if we keep the constant price of a product and increase the number of skilled
workers, the intensive supply of that product will increase, and the supply of others will
decrease (Opp 2009).

Table 2. Vietnamese labor assumption (unit: million)

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Figure 8. Vietnamese labor illustration

Figure 9. Vietnamese labor after the labor of Japan and Korea entering
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d. Recommendations from IRS:
There are 99% of electronics manufacturing firms of all size are owned by foreigner in 2018,
which means these foreign companies are the most likely to be affected by COVID-19, such
enterprises have to face with a contraction of 10% to 20% in their order for 2020 (PwC
2020). It also delays the logistics process which requires more safety protocol for suppliers of
tech firms and distributors (Sen 2021). Although Vietnam has been free from infection for
nearly 1 year, it is difficult for the telecommunication industry to emerge strongly out of the

pandemic. But it can slowly regenerate and regain its position if the government can propose
policies in terms of taxation or making an incentive by supporting tech firms with low
interest rates. As a result, the telephone industry can strongly emerge through crisis to
rebound to the market.

e. Recommendations from Heckscher-Ohlin model:
After Covid-19, in the first half of 2021, footwear export increased by 28.4% compared to the
same period last year. The reason is Vietnam has been less affected by Covid-19. Moreover,
low working costs and stable politics are elements that prompt investors to place orders with
local companies (Anh 2021). Because Vietnam is abundant in unskilled workers, the
government should complete research and investigation of work market patterns and new
skills and the industry demand in the market to react to industry changes and match
organizations and local human resource development centers (CARE 2020).

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